India to Invest in Iran's Chabahar Port

The Indian government’s decision in late October to participate in the development of Iran’s Chabahar port will jump-start this long-delayed project. The port’s expansion will boost its emergence as a major transshipment hub and its strategic location is expected to transform the region’s geopolitics. But will this ambitious project realize its full potential given unrest in the Sistan-Balochistan province, where it is located, and the prospects of a civil war looming large in Afghanistan?

BACKGROUND: After over a decade in cold storage, Iran’s Chabahar port project is set to gather momentum with India deciding after much dithering to participate in its development. India proposes to invest US$ 85 million over a year to convert two berths it will lease for a ten-year-period into a container terminal and a multi-purpose cargo terminal. Its development and use of the port’s capacity will boost the prospects of Chabahar port emerging as a trade and transshipment hub.

It was during his visit to India in 2003 that Iran’s then president Mohammed Khatami mooted the idea of developing Chabahar port into a trade and transshipment hub. However, the project floundered with India coming under U.S. pressure for co-operating with Iran. Doubts also existed over the project’s economic viability given Iran’s international isolation and the looming threat of sanctions. It was only in 2012 that India’s interest in Chabahar revived. In March, it defied U.S. objections to transport 100,000 metric tons of wheat to Afghanistan via Chabahar port – the first time it was using this gateway to Afghanistan. Improving U.S.-Iran relations over the past year cleared the way for Delhi’s decision to participate in the Chabahar project. India and Iran are expected to sign an agreement soon.

When Chabahar’s development as a trade and transshipment hub was first discussed a decade ago, three countries – Iran, India and Afghanistan – were involved in the plan. With the port’s immense potential expanding and unfolding in the years since, at least a dozen countries have clambered on board the project. Among them is China, which financed, built and now runs Chabahar port’s main competitor, the Gwadar port, which is located just 72 kilometers east of Chabahar in Pakistan.

IMPLICATIONS: Iran plans to expand Chabahar port’s capacity from the current 2.5 million tons per annum to 12.5 million tons. It has invested around US$ 340 million in the project, declared the area around the port as a Free Trade Industrial Zone and constructed a petro-chemical complex to receive gas from Iranshahr. The Chabahar port’s development could change the face of Iran’s shipping industry. It is Iran’s first deep-sea port, the absence of which has hitherto severely hobbled Iranian shipping. Bandar Abbas, for instance, which handles 85 percent of Iran’s shipping, cannot receive ships exceeding 100,000 tons. Such ships bound for Iran first dock in the United Arab Emirates (UAE), where the cargo is then loaded on to smaller ships to suit the shallower waters of Bandar Abbas port. A deep-sea port at Chabahar will free Iran of this problem, saving it millions of dollars in fees to the UAE and reducing its dependence on that country.

Chabahar’s location at the mouth of the Gulf of Oman on Iran’s Makran coast endows it with immense strategic significance. Besides, it is situated 300 kilometers east of the Strait of Hormuz, giving Iran direct access to the Indian Ocean. Its location outside the Hormuz straits means that even if this strategic waterway were to be closed by Iran’s enemies, Chabahar port would continue to function. It reduces Iran’s vulnerability to international pressure immeasurably.

For land-locked Afghanistan, Chabahar port promises a widening of options. Kabul currently depends on Pakistan for access to the sea, an uncertain option given the volatile relations between Islamabad and Kabul. Not only is the route to the Chabahar port safer and more cost-effective but will also significantly reduce Afghanistan’s dependence on Pakistan.

Chabahar port offers India a gateway to enter Iran and to realize its economic and strategic ambitions in Afghanistan and the Central Asian republics. Pakistan has denied Indian goods overland access to Afghanistan, severely restricting trade with Afghanistan and Central Asia. Its trade with the CARs, for instance, was valued at just US$ 738 million in 2012. Chabahar port could change that. With Indian goods getting preferential treatment and tariff reductions there, India’s trade with Afghanistan and Central Asia could grow exponentially. An expanded role for India in Afghanistan’s reconstruction will boost its influence there. India is also eyeing trade with Europe via Chabahar port and the International North-South Transport Corridor (INSTC) as this route is estimated to be 40 percent shorter and 30 percent less expensive than its current trade via the Red Sea-Suez Canal-Mediterranean Sea route.

Recognizing that Chabahar’s full potential can be tapped only by improving its connectivity, India and Iran have built roads and railway lines. Iran has built a road running from Chabahar through Iranshahr and Zahidan to Milak on its border with Afghanistan. Across the border on the Afghan side, India has built the Zaranj-Delaram highway, which links up with the Garland Highway that connects Afghanistan’s main cities. Thus goods offloaded at Chabahar port can be sent via trucks across Afghanistan. Several railway lines are in the pipeline too, including one that runs northwards from Chabahar to Zahidan, where it will hook up with the Iranian rail network, and a 900-kilometer railway line between Chabahar and the Hajigak iron ore mines in Afghanistan.

To draw the Central Asian states into channeling their trade with South and West Asia through Chabahar, Iran has enhanced infrastructure co-operation with these countries to facilitate transport of goods to the port. Teheran’s financing of the Kyrgyz stretch of the Iran-Afghanistan-Tajikistan-Kyrgyzstan-China road project and the Anzob tunnel in Tajikistan, for instance, must be seen in this light.

With India unlikely to be able to provide the massive investment that the Chabahar project requires, China, which also has an interest in Chabahar, could step in. Gwadar port provides China’s oil imports from the Gulf with a shorter overland route, one that bypasses the Malacca Straits and the South China Sea. Participation in Chabahar port will provide Beijing with another such overland option. China’s likely participation in Chabahar has triggered unease in Delhi over being edged out of the project. Indeed, it was such anxieties that prompted India to decide on participating in the port’s development. However, Indian apprehensions over China’s participation in Chabahar seem excessive. However large the Chinese investment in Chabahar, its role in the port will not be the same as in Gwadar as Iran is unlikely to hand over control of the port to China or any other country. In fact, China’s investment in Chabahar’s capacity could facilitate India’s trade in the region.

CONCLUSIONS: Discussions on Chabahar port often trigger comparisons with Gwadar. Chabahar’s development is at least a decade behind that of Gwadar as Iran’s difficult relations with the U.S. inhibited the project’s progress. That is expected to change now as Iran’s international isolation is easing and India is stepping in. Importantly, which of the two ports will emerge as the preferred port option for Afghanistan and the Central Asian states? Will Chabahar attract more trade than Gwadar? Distances between Gwadar and Central Asian cities are shorter and a transit corridor being developed between Gwadar and Kashgar could spur Gwadar’s attractiveness to the CARs. But extreme unrest in Pakistan’s Balochistan province severely undermines Gwadar’s appeal.

Although Chabahar’s strategic location and its improving connectivity to Central Asia and beyond bodes well for its future, problems loom. Its success hinges on the security situation in the restive Sistan-Balochistan province where it is located and in Afghanistan through which vital roads and railway lines run to Central Asia and beyond. Iran has managed to put a lid on the insurgency in Sistan-Balochistan to some extent but with the issues underlying the conflict unresolved, violence could erupt again, prompting investors to rethink plans. Iran can minimize this challenge by ensuring that locals benefit from the port project. The situation in Afghanistan is even more worrying and the deteriorating scenario there compromises the tapping of Chabahar’s full potential. Should Afghanistan descend into civil war or Taliban influence there expand, completion of roads and rails linking Iran with Central Asia could be delayed, throwing into jeopardy Chabahar’s emergence as a transshipment hub and snuffing out the grand ambitions of India and Iran.

The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.